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Growth and business cycles with imperfect credit markets

  • Chakrabarty, Debajyoti

We study the process of growth and business cycles in an open economy which has access to international ¯nancial markets. The ¯nancial market imperfection originates from costly state veri¯cation and a positive probability of default on loans. The degree of credit market imperfection is endogenously derived. The results show that developed economies are able to borrow on easier terms than emerging countries. The credit market imperfection may cause some economies to fall into a development trap if the initial endowment of capital is too low. The ¯nancial market frictions also generate interesting business cycle dynamics. Financial market imperfections help in replicating the empirical fact that output growth shows positive autocorrelation at short horizons. The model also predicts that a poorer economy will experience a more severe and persistent e®ect on investment and output due to an exogenous shock.

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Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 29A-2002.

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Date of creation: 2002
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Handle: RePEc:zbw:zeiwps:b29a2002
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  1. Greenwood, J. & Smith, B.D., 1995. "Financial Markets in Development, and the Development of Financial Markets," RCER Working Papers 406, University of Rochester - Center for Economic Research (RCER).
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  3. Debajyoti Chakrabarty, 2000. "Poverty traps and Growth in a model of Endogenous Time Preference," Departmental Working Papers 200018, Rutgers University, Department of Economics.
  4. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
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  10. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
  11. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  12. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  13. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  14. Azariadis, Costas & Chakraborty, Shankha, 1999. "Agency Costs in Dynamic Economic Models," Economic Journal, Royal Economic Society, vol. 109(455), pages 222-41, April.
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  16. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  17. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
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